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Archives: 11/2008

Naive and/or deceptive politicians often claim that sleaze is the enemy of good government, but the real truth is that government is the biggest friend of corruption. Simply stated, when politicians redistribute more than $3 trillion (and more indirectly via regulation), lobbyists and interest groups will line up to stick their snouts in the trough. The Wall Street bailout is an excellent example of this distasteful practice. The headline of a recent New York Times story summarizes the problem, noting “Lobbyists Swarm the Treasury for a Helping of the Bailout Pie.” The excerpt below reveals some of the corruption that is so pervasive in Washington. The most absurd part of the story is the quote from a Treasury Department official who says the government shouldn’t pick winners and losers - a rather strange statement since the bailout exists so that government can pick winners and losers:

When the government said it would spend $700 billion to rescue the nation’s financial industry, it seemed to be an ocean of money. But after one of the biggest lobbying free-for-alls. in memory, it suddenly looks like a dwindling pool. Many new supplicants are lining up for an infusion of capital as billions of dollars are channeled to other beneficiaries like the American International Group, and possibly soon American Express. …The Treasury Department is under siege by an army of hired guns for banks, savings and loan associations and insurers – as well as for improbable candidates like a Hispanic business group representing plumbing and home-heating specialists. That last group wants the Treasury to hire its members as contractors to take care of houses that the government may end up owning through buying distressed mortgages. …”Unfortunately, I don’t have a lot of good news for them individually,” said Jeb Mason, who as the Treasury’s liaison to the business community is the first port-of-call for lobbyists. “The government shouldn’t be in the business of picking winners and losers among industries.” Mr. Mason, 32, a lanky Texan in black cowboy boots who once worked in the White House for Karl Rove, shook his head over the dozens of phone calls and e-mail messages he gets every week. “I was telling a friend, ‘this must have been how the Politburo felt,’ ” he said. …The first wave of lobbying came in early October when Mr. Paulson announced the plan to buy troubled mortgage-related assets from banks. The Treasury said it would hire several outside firms to handle the purchases, and would dispense with federal contracting rules. Law and lobbying firms that specialize in government contracting fired off dispatches to clients and potential clients explaining opportunities in the new program. Capitalizing on the surge of interest, several large firms, including Patton Boggs; Akin Gump; P & L Gates; Fried, Frank, Harris, Shriver & Jacobson; and Alston & Bird, have set up financial rescue shops. Alston & Bird, for example, highlights its two biggest stars – former Senator Bob Dole and former Senator Tom Daschle. Mr. Dole “knows Hank Paulson very well” and has been “very helpful” with the financial rescue groups, said David E. Brown, an Alston & Bird partner involved in its effort. “And of course, Senator Daschle is national co-chair of the Obama campaign,” Mr. Brown added, noting that because Mr. Daschle is not a registered lobbyist, his involvement is limited to “high level advisory and strategic advice.” Ambac Financial Group, in the relatively obscure bond insurance business, never needed lobbyists before, said Diana Adams, a managing director. But its clients persuaded the company to hire two Washington veterans – Edward Kutler and John T. O’Rourke – who helped arrange a recent meeting with Phillip L. Swagel, an assistant Treasury secretary. “We haven’t really asked for much in the past,” Ms. Adams said. …Some lobbyists, Mr. Mason said, had called him even though they did not have any clients looking to get into the program or worried about its restrictions. They were merely seeking intelligence on which industries would be deemed eligible for assistance. He suspects they were representing hedge funds that wanted to trade on that information.

The “Big Three” auto producers - Ford, Daimler-Chrysler and General Motors - want the public to believe their industry faces an existential threat. It doesn’t. They want the public to believe they are innocent victims of circumstances beyond their control. They’re not. They want the treasury secretary to authorize a fresh $25 billion bailout for the industry and the President-elect to pledge support for their parochial cause…

None of this is the fault of the left. After the events of the 20th century–national socialism, international socialism, inter-species socialism from Earth First–anyone who is still on the left is obviously insane and not responsible for his or her actions….The financial crisis that is hoisting us on our own petard is only the latest (if the last) of the petard hoistings that have issued from the hindquarters of our movement. We’ve had nearly three decades to educate the electorate about freedom, responsibility, and the evils of collectivism, and we responded by creating a big-city-public-school-system of a learning environment.

To suggest that in electing Barack Obama and a Democratic congressional majority, voters were choosing big government and liberalism over small government and conservatism would imply that either the Bush administration, the current Republican congressional leadership, or, for that matter, John McCain, actually supported smaller government.

But even before the Wall Street bailout, President Bush spent money in a way that would make any liberal proud.

In the course of making his argument that Cato frequently makes counterproductive alliances of convenience (from a strict libertarian perspective, anyway) with corporate special interests, Matthew Yglesias writes at Cato Unbound:

The free-market case for a revenue-neutral carbon pricing scheme seems fairly impeccable to me. But instead of organizing its climate change efforts around seeking to ensure that any future carbon pricing plan be as close to revenue neutral as possible, Cato prefers to steadfastly defend the rights of industry to unload air pollution unimpeded.

I’m not sure how one might define a “free market case” for a revenue-neutral carbon pricing scheme, but the economic case for it would require evidence that (1) the benefits of the tax shift would exceed the costs, and (2) that the proposed tax shift is a less expensive means of addressing climate change harms than other possible remedies.

Regarding (1), the argument is intuitively plausible but is, in fact, quite problematic. And you don’t need to be a Cato libertarian to come to this conclusion. You will find great skepticism about the claim that a tax shift would on balance prove economically positive from economist Lawrence Goulder (a supporter of carbon taxes, by the way). This seminal piece from economists A. Lans Bovenberg and Ruud de Mooij is also good. As energy economist Stephen Smith observes after surveying the relevant economic literature on eco-tax shifts:

Ecotaxes are likely to involve distortionary costs at least as high as those involved in raising equivalent revenues through existing taxes. If the question is posed whether we would choose to use energy taxes, in preference for existing taxes on labour and other bases, in the absence of any environmental benefits, then the answer is almost certainly that we would not. Energy taxes would be likely to involve just as much distortion of the labour market as income taxes, and at the same time distort the commodity market. Only if there are expected to be environmental gains can the use of environmental taxes be justified, and the case for ecotax reform must be made primarily on the basis of the environmental gains that would result.

Read that last sentence again.

So, are the benefits that might flow from a carbon tax (defined at the monetarized value of the temperature reductions that might follow) greater than the costs of the same? Energy economist Richard Tol’s review of the published economic literature suggests that the monetarized damages that follow from a ton of carbon emissions at the margin (if mean estimates of future climate change from the IPCC are to be believed) likely works out to about $2. Hence, if a carbon tax is set above $2 dollars, it will may very well deliver more social costs than benefits.

Regarding (2), Indur Goklany makes a strong case that adapting to climate change and applying targeted public policy initiatives to directly address subsequent harms is much cheaper – and much more effective – than a policy of reducing greenhouse gas emissions. Moreover, Goklany points out that this conclusion holds even if we accept the worse-case scenarios spun-out in the Stern Review on the economics of climate change.

Of course, Matthew Yglesias is free to disagree with the above. But the case for a revenue-neutral carbon pricing scheme is not “fairly impeccable” … from an economic perspective, anyway. There are ample grounds for disagreement … and that’s true even if we ignore the debate about the underlying science.

Government equity investment or rescue of the broader (non-financial) economy is a mistake. It will damage economic efficiency in the long-term by diluting the value of private shareholders and reduce incentives for cost cutting and product quality innovations.

Of course, the current focus is not on long-term incentives but on how to shorten and moderate the current economic recession. The constantly changing mix of initiatives from the Treasury suggest:

1. A lack of knowledge/vision about what to do–so they’re throwing money at everything that moves in the hope that something will work. These ex-Goldman Sachs personnel that make up the Paulson team are probably not economists–and certainly not good ones. The majority are probably MBAs with little understanding of how things really work in the economy. They probably have a microeconomic firm-specific orientation and management skills that are unsuited for their current responsibilities. If I’m wrong, I’d be very surprised. If I’m right, it’s showing.

2. An attempt to assuage competing political constituencies and provide benefits to potential future supporters.

3. An attempt to distribute wealth to those people/firms that the next Congress and president won’t support–by tying their hands through government ownership of firms.

4. A deliberate and cynical attempt to damage the economy even more to make life difficult for the Obama administration.

I think # 4 is cynical on my part. But although unlikely, it is not impossible given how polarized the political atmosphere was during the GW Bush presidency.

Broad government involvement in private firms to solve the economic crisis is a dangerous turn. The shareholders in these firms took risks and should bear the consequences of their decisions. If they sink, the economy may recover faster as other businesses are created over time in non-housing and less energy intensive sectors. Supporting existing, inefficient firms run by poor decision makers is likely to prolong the recession because keeping those firms and their managers afloat won’t help to restore market confidence. And, this policy will encourage future investors/managers to take even riskier decisions under expectations of yet another government bailout if they fail. Finally, government debt-financed wealth injections are worsening the nation’s finances–we’re already swimming in huge and unpayable entitlement obligations to a growing number of retirees, disabled, poor, and the sick.

The government purchase of securitized auto loans is probably intended to insure auto company creditors, who would otherwise become bankrupt and prolong the credit-flow freeze. It’s another source of bad assets on bank and non-bank financial firm portfolios that’s contributing to the market failure in that sector. I’m more sympathetic to the original TARP idea than government officials seem to be. That way the government’s involvement in the private sector will be limited and it will remove bad assets from their balance sheets–which are responsible for the pervasive uncertainty among financial market players and is causing the credit freeze. But under TARP, government officials don’t get to choose whom to support–they must buy up assets from whoever is currently holding them–be it domestic or foreign firms, “friends and relatives” or “strangers and enemies.”

How much money does this man have to lose before he gives up on the socialist, monopoly system we’ve got now and starts pushing truly game-changing reforms like school choice?

Don’t get me wrong: I’m not against Gates trying to formulate standards and tests and convince schools to use them. I don’t distrust Gates because he’s too influential, for instance, nor do I have any problem with national standards as long as parents are free to choose schools, and schools are free to adopt, oh, let’s call them Standards Vista. I just think Gates is delusional if he thinks the inevitably politicized, special-interest-dominated public schooling system that he’s never been able to change before is going to suddenly rush to adopt really challenging standards and tests.

As I’ve repeated until I’m blue in the face (or numb in my typing fingers) really high standards and rigorous tests will never be adopted and maintained by most public school systems because they would be hard to reach and, hence, a big pain for the people with all the power: teachers, administrators and politicians. Why challenge yourself when you can get the money for free?

So let’s get first things first, Mr. Gates: Get education money to parents, and autonomy to schools, so we can have real choice and competition. Then I’ll gladly cheer on Microsoft as it battles Apple, the Educational Testing Service, Billy Mays, or anyone else who wants a piece of the suddenly competitive, innovative, and dynamic national-standards action.

Kudos to Clarence Page for hitting President-elect Barack Obama on school choice.

Obama’s daughters are currently enrolled in a private school. The Obamas are likely to send them to one of the more expensive and exclusive private schools in DC. But Obama opposes private school choice programs that would allow parents with smaller incomes and less power to find good schools for their own children.

Page asks Obama, “what about the kids left behind in failing schools?”

Unfortunately, Obama has followed the lead of most other black politicians and decided that the poor black (not to mention white, Hispanic, Asian, etc.) kids left behind can wait for another 5, 10, or 15-year plan to improve the public schools.

It’s a sad political fact that black leaders are as strongly opposed to school choice as black parents are strongly supportive of it.

A 2001 study from the Joint Center Political and Economic Studies found 70 percent of black elected officials oppose vouchers while “in the black population, there was what can accurately be described as overwhelming support for vouchers (approximately 70 percent) in the three youngest age cohorts” under age 51. Support for vouchers in the inner-city can hit 77 percent according to research conducted by Terry Moe.

There is a massive and problematic disconnect on education policy between the average black voter on one side and the Democratic Party and black leaders on the other. It’s nice to see a liberal pundit point this out.

What I like best about this paper is how Tim avoids joining one “team” or another. He evenly gives each side its due - each side is right about some things, after all - and calls out the specific instances where he thinks each is wrong.

Lay readers may be challenged by some of the concepts in the paper, but there’s no time like the present to familiarize oneself with the basic infrastructure of our future economy and society.

Tim makes the case for treating the “end-to-end principle” as an important part of the Internet’s fundamental design. Tim disagrees with the people who argue for a network with “smarter” innards and believes that neutrality advocates seek the best engineering for the network. But they are wrong to believe that the network is fragile or susceptible to control. The Internet’s end-to-end architecture is durable, despite examples where it is not an absolute.

Tim has history lessons for those who believe that regulatory control of network management will have salutary effects. Time and time again, regulatory agencies have fallen into service of the industries they regulate.

“In 1970,” Tim tells us, “a report released by a Ralph Nader group described the [Interstate Commerce Commission] as ‘primarily a forum at which transportation interests divide up the national transportation market.’” Such is the likely fate of the Internet if its management were given to regulators at the FCC and their lobbyist friends at Verizon, AT&T, Comcast, and so on.